ances as wholesale or group purchasers. Plan selection could be done through an extensive request-for-proposal (RFP) competitive bidding process in which the government requires that proposers address a number of quality, service, and other measures that are important to Medicare's elderly and disabled populations. Only a selected menu of plans would be offered. Contract provisions could be negotiated to get quality and service performance guarantees for Medicare enrollees. Contract terms could also include financial incentives and penalties related to performance; for example, the St. Louis business coalition will put 4 percent of plan premiums aside for its plans to earn depending on their scores on objective, audited performance criteria.
An expertly run RFP process would allow for the use of more, and more sophisticated, criteria for selection than consumer report cards and could be designed to strengthen competition for excellence in serving Medicare's higher-need populations. A stronger purchasing or negotiating role would also allow the federal government to take much more effective measures to deal with risk adjustment problems on a market-by-market basis, ranging from banning plans that skim the Medicare market or that ''demarket" higher-expense populations to closed-door bargaining with plans' representatives to develop appropriate risk adjustors, high-cost capitation arrangements, and other approaches to fair pricing. Over time, this negotiating capability would allow the federal government to move beyond the Average Adjusted Per Capita Cost (AAPCC) payment formula to implement competitive premium bidding.
The implementation barriers to this approach are challenging because of the potential need for the federal government to take on this new, sophisticated role in a large number of market areas. Fortunately, the Medicare health plan market is now so concentrated that this expanded role could be initiated selectively on a demonstration or research and development basis. The most promising areas would likely include Florida and California, which have 60 percent of Medicare HMO enrollees and a highly competitive Medicare market.
This type of purchasing strategy could also be fostered by the federal government by chartering competing consumer pur-